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Latest market-sensitive news and views - Sept. 29
Shutdown Countdown: Focus Now on Market, Gov't Data Impacts of Likely Shutdown
Sen. Feinstein dies | UAW strike expansion | Miss. River | Ag disaster aid update
Today's Digital Newspaper
MARKET FOCUS
— Equities today: Asian and European stocks were mixed to firmer overnight. U.S. Dow opened just over 200 points higher and has since pared the gains. The Federal Reserve's primary inflation rate showed that core price pressures cooled further in August even as rising energy prices lifted headline inflation. In Asia, Japan -0.1%. Hong Kong +2.5%. China +0.1%. India +0.5%. In Europe, at midday, London +0.8%. Paris +1%. Frankfurt +1%.
U.S. equities yesterday: The Dow ended up 116.07 points, 0.35%, at 33,666.34. The Nasdaq was up 108.34 points, 0.83%, at 13,201.28. The S&P 500 rose 25.19 points, 0.59%, 4,299.70.
The Dow is down 3% month to date heading into the last trading day of the period. The S&P 500 is down 4.6% month to date, and the Nasdaq Composite is down nearly 6%. September is often a down period for the market: Over the past decade, it's been the worst month for the S&P, shedding 1.53% on average. October should prove better at least based on history: That month has been the second-best performing month for the S&P over the last 10 years, gaining an average of 2.26%.
— Quotes of note:
- Chicago Fed President Austan Goolsbee said policymakers shouldn't place too much weight on the traditional economic idea that steep job losses are needed to quell inflation, which he said could lead officials to raise interest rates too much.
- Impact on Fed decision on rates if gov't shuts down: "No data, no hike" has been the thinking in the bond market about the Fed's Nov. 1 policy decision, as Ian Lyngen at BMO Capital Markets put it this week.
- China propaganda. "Beijing has invested billions of dollars to construct an information ecosystem in which PRC propaganda and disinformation gain traction and become dominant." — A report released Thursday by the U.S. State Department's Global Engagement Center, which was established in 2016 to counter foreign propaganda and disinformation abroad.
- $2.3 billion — The size of an Energy Department program designed to help strengthen the U.S. power grid against the effects of extreme weather.
— U.S. core PCE prices show modest monthly increase in August, easing annual inflation. In August 2023, core Personal Consumption Expenditures (PCE) prices in the U.S., which exclude food and energy, saw a modest month-over-month increase of 0.1%. This growth rate was the lowest since July 2022 and fell below market expectations of a 0.2% rise. On an annual basis, the core PCE price index, a key metric closely watched by the Federal Reserve, decreased to 3.9%, marking the lowest level since September 2021.
When considering food and energy costs, the PCE price index exhibited a more substantial monthly gain, rising by 0.4% compared to the previous month. On an annual basis, factoring in food and energy, the index increased by 3.5 percent compared to the corresponding period in the previous year.
The PCE inflation data follows the Fed's hawkish rate-hike outlook on Sept. 20, which reflected relatively robust economic growth and sticky inflation. The Fed forecast core PCE inflation for the year at 3.7%. But that assumes relatively hot inflation in the final months of 2023, despite the recent cooling trend. If core PCE inflation undershoots Fed expectations in the next few months, policymakers will have an excuse not to go ahead with one more rate hike this year.
— Eurozone's inflation rate drops to 4.3% in September, easing pressure on interest rate hikes. The annual inflation rate saw a notable decline to 4.3%, down from August's 5.2%, marking its lowest level in nearly two years. This figure potentially signals that the European Central Bank (ECB) may refrain from further interest rate hikes in the near term. However, the ECB is unlikely to initiate rate cuts anytime soon, given that inflation still remains more than double its target rate.
— Mortgage rates reach nearly 23-year high, signaling housing market struggles. Mortgage rates surged to their highest level since December 2000, hitting an average of 7.31% for the standard 30-year fixed mortgage, according to Freddie Mac. This significant increase in mortgage rates, which have doubled since the Federal Reserve's campaign against inflation began, is further dampening the housing market. The surge in rates, loosely tied to the 10-year Treasury yield reaching its highest point in nearly 16 years, is causing concerns for both homebuyers and sellers.
A lack of available housing inventory is further contributing to elevated home prices. Homebuyers are hesitant to commit to higher monthly payments, while homeowners with lower-rate mortgages are reluctant to sell their homes.
Unusual: house prices are now rising alongside mortgage rates, creating challenges for both buyers and sellers. The increasing financial burden on households is evident, with the median American household needing 44% of its income to cover annual payments on a median-priced home.
Impact: Home sales have plummeted to their slowest pace since January, down by over a third since the beginning of 2022.
Market perspectives:
— Outside markets: The U.S. dollar index was weaker, with the euro and British pound both firmer against the greenback. The yield on the 10-year U.S. Treasury note was weaker, trading around 4.55%, with a mixed tone in global government bond yields. Crude oil futures were climbing higher, with U.S. crude around $92.95 per barrel and Brent around $94 per barrel. Gold and silver were higher, with gold around $1,885 per troy ounce and silver around $23.33 per troy ounce.
— California governor eases anti-smog rule as gasoline prices surge amid end of summer. California, known for its consistently high gasoline prices, is experiencing a surge in gasoline costs, prompting Governor Gavin Newsom to act by lifting an anti-smog rule in a bid to provide relief at the pump. Gas prices for regular fuel in the state have surpassed $6 per gallon, reaching their highest levels since the previous October, and significantly exceeding the national average.
Reasons why. While rising oil prices have contributed to the increase in gasoline costs nationwide, California's prices have remained notably high due to various factors, including the state's stringent environmental compliance requirements, such as carbon credits and other regulations.
— Low Mississippi River water levels are impacting the ag sector. Farm Bureau notes that the efficiency of barges relies on adequate water levels for unobstructed navigation. Dry conditions have lowered river water levels, making it difficult for barges to navigate. The Army Corps of Engineers reported a significant drop in the river's stage at St. Louis, with water levels 46% lower than the previous three-year average and 24% lower than the same period last year. To adapt. the industry has reduced draft allowances and tow sizes, which means more barges are needed to move the same quantity of products, resulting in transit delays of two to three days. USDA's Agricultural Marketing Service tracks barge rates along the Mississippi River system. Rates have soared to over 900% of their underlying tariff in some locations due to the impact of low water levels. The low water levels are particularly problematic during the harvest season when farmers need to transport their crops to storage facilities.
— USDA daily export sale: 223,540 MT corn to Mexico during 2023-2024 marketing year.
— Wheat headed for the worst run of quarterly losses in 14 years as bumper harvests in parts of the Northern Hemisphere offset ongoing tension in the Black Sea after the collapse of a grain deal. Bloomberg.
— Grain Stocks, Small Grains Summary out at noon ET. USDA's Quarterly Grain Stocks Report at 12:00 noon ET will set final 2022-23 ending stocks for corn and soybeans. The report has a history of surprises, especially for corn, with analysts routinely missing those estimates by a wide margin. Traders expect USDA to report Sept. 1 stocks at 1.429 billion bu. for corn, 242 million bu. for soybeans and 1.772 billion bu. for wheat. The report has also historically featured revisions to the previous year's soybean crop and since 2020 the prior year's corn production. USDA will also issue its final estimates for 2023 wheat production in the Small Grains Summary. Traders expect all wheat production to come in at 1.729 billion bu., which would be down 10 million bu. from the August estimate.
— ADM and Syngenta collaborate to develop low-carbon oilseeds for growing biofuels demand. Archer-Daniels-Midland Co. (ADM), a prominent crop trader, and Syngenta AG, a leading seed company, entered into a partnership to jointly research and introduce enhanced varieties of oilseed crops. This collaboration aims to meet the surging demand for low-carbon biofuels, which are increasingly powering various modes of transportation, including trucks, buses, and airplanes. The quest for ingredients to produce eco-friendly liquid fuels has intensified, with major energy companies, including Chevron Corp., actively seeking biofuel components to capitalize on government incentives promoting cleaner energy sources. This competitive environment has sparked a race to develop oilseeds that are both more environmentally friendly and higher-yielding, encompassing familiar crops like soybeans and canola, as well as lesser-known varieties like camelina.
Big growth forecast. According to projections from the International Energy Agency (IEA), global demand for biofuels is expected to grow by 22% from 2022 to 2027. This partnership between ADM and Syngenta reflects the industry's response to the growing need for sustainable and low-carbon energy solutions.
— India's sugar market faces possible export curbs following reduced monsoon rains. As India's monsoon season nears its conclusion, attention is fixed on the state of the sugar crop amid speculation regarding potential export restrictions. Concerns have been mounting in the global sugar market for weeks, with fears that poor monsoon rains could limit sugar production and prompt India to curb exports to stabilize domestic prices, particularly in the lead-up to an election next year. Although India's food secretary expresses confidence in the crop, traders, analysts, and millers anticipate export constraints. Bloomberg.
— Europe has almost run out of local olive oil supplies and is set for more shortages after extreme weather around the Mediterranean this summer damaged harvests for a second year, the UK's Guardian reports.
CONTINUING RESOLUTION (CR) & POSSIBLE GOV'T SHUTDOWN
— Impending gov't shutdown looms as House Speaker struggles to secure votes for funding extension. The House is expected to address a Republican-proposed stopgap bill today, aiming to extend gov't funding. However, House Speaker Kevin McCarthy (R-Calif.) is facing challenges in gathering the necessary votes to pass the bill, leaving Congress on the brink of triggering a shutdown. Both the Senate and House are deadlocked in negotiations on how to ensure the government's continued operation, and with funding set to expire at midnight on Saturday, a shutdown now appears inevitable.
McCarthy's stance remains uncertain as he has not confirmed whether he would seek a compromise with Democrats if conservative renegades reject his stopgap proposal. This situation poses a significant test to his leadership as Speaker, with some House conservatives even suggesting the potential for a vote to remove him from his position. The Washington Post reported that House Majority Whip Tom Emmer (R-Minn.) was floated as a McCarthy successor. Emmer says he doesn't want the job.
Market impact: A rule of thumb among Federal Reserve staff members is that each week of shutdown shaves off 0.2 percentage point from the annualized GDP growth rate, according to David Wilcox, who used to work at the Fed and is now at Bloomberg Economics. Typically, losses get made up in the next quarter. (See related item below for more market impacts.)
Of note: There's never been a comprehensive shutdown that lasted more than about a week, according to Ariana Salvatore, a Morgan Stanley researcher. The difference from the last shutdown in 2019 is this time none of the federal agencies have been funded for 2024. Congress has been unable to pass all 12 appropriations bills on time through each chamber since 1997
The 2018-19 shutdown was the longest in recent U.S. history at 34 full days. A timeline shows that government shutdowns have been getting longer in the last three decades, with the second-longest and the fourth-longest shutdown taking place in 1995 and 2013, respectively. Throughout the 1980s, shutdowns were numerous, but shorter, while in the 1970s, they also ran somewhat longer, but only surpassed two weeks once, in 1978.
— Another farm bill impact if gov't shuts down: CBO. The Congressional Budget Office (CBO) told lawmakers it will cease work Oct. 10 without funding. That could cause big issues for the farm legislation, as agriculture lawmakers say they're already waiting for critical budget estimates they need to write the measure.
— House Republicans passed three GOP-drafted FY 2024 spending bills— Defense, Homeland Security and State-Foreign Operations. A fourth spending bill, Agriculture, went down in a widely expected defeat. Two Democrats — Reps. Jared Golden (Maine) and Marie Gluesenkamp Perez (Wash.) — crossed the aisle to vote with Republicans on two of the spending bills, Defense and Homeland Security. GOP moderates said they would not support the Agriculture funding legislation because it included a provision that would limit access to mifepristone, an abortion pill. The legislation calls for nullifying a Biden administration rule allowing mifepristone to be sold in retail pharmacies and by mail with prescriptions from a certified health care provider.
Overall, House Republicans have now passed four FY 2024 spending bills — the three from last night plus the MilCon-VA bill in July.
House Speaker Kevin McCarthy (R-Calif.) hailed the House vote as proof that his "regular order" approach — demanded by the right wing in the House GOP Conference — is working, even as the government is about to shut down. McCarthy has a news conference today at 10 a.m. ET.
Upshot: The House GOP version of these annual spending bills include billions of dollars in spending cuts that aren't acceptable to the Senate nor President Joe Biden.
— House is set to vote on the Republicans' short-term Continuing Resolution (CR) proposal today, with the Rules Committee convening at 8 a.m. ET to discuss the rule governing this bill. The proposed CR, put forth by Rep. Byron Donalds (R-Fla.), aims to keep federal agencies operational for a period of 30 days, which is notably shorter than the 47 days being considered by the Senate.
Rules Committee Republicans plan to amend the bill to enforce spending at a rate of $1.47 trillion annually, a figure significantly lower than what the Senate and White House are likely to accept. The proposed changes also aim to shield the Pentagon, Homeland Security, and the VA from any budget cuts, potentially resulting in reductions to social programs.
The bill also incorporates elements from HR 2, a stringent border security bill previously rejected by Democrats. Additionally, it includes provisions for a fiscal commission favored by McCarthy.
Details: House Republicans on early Friday rolled out their new plan for a short-term spending bill that would stave off a government shutdown. The plan, dubbed the Spending Reduction and Border Security Act, would extend funding through the end of October, but impose across the board cuts of about 30% – with exemptions for national defense, the Departments of Veterans Affairs and Homeland Security, and for funding designated disaster relief.
The House GOP leadership faces skepticism regarding the passage of this rule, primarily due to conservative opposition. Roughly 10 Republicans have dug in on their opposition to any short-term funding deal, blocking the House majority from delivering a bill. Many conservatives dislike a stopgap bill because it continues existing funding levels for a short time, meaning they would have to vote for levels they voted against last year.
Election impact? There are 18 GOP representatives in districts President Biden carried in 2020 that will be endangered by these developments. Republicans won the five closest races that flipped control of the House by a combined 7,169 votes of 1,379,398 cast.
— Senate funding bill for Ukraine and disaster relief hangs on border security amendment negotiations. Senate Majority Leader Chuck Schumer (D-N.Y. is pushing forward with a bipartisan funding bill that would keep the gov't operational for 47 days while allocating significant funding for Ukraine and disaster relief efforts. However, the fate of this measure hinges on the Senate's ability to secure a deal on a border security amendment being crafted by Republicans and Sen. Kyrsten Sinema (I-Ariz.).
A key question is whether Republicans will provide the 60 votes required to advance the continuing resolution without a border-related amendment agreement. Negotiations around this amendment are ongoing, and lawmakers are grappling with the challenge of crafting a proposal that could garner sufficient support in the Senate while satisfying conservative House members.
Of note: Republicans are seeking not only increased funding for the Department of Homeland Security (DHS) and Immigration and Customs Enforcement (ICE) but also policy changes. The challenge lies in the fact that policy changes would require a 60-vote threshold, while funding additions could pass with a simple majority.
There will be delays in the legislative process, with Sen. Rand Paul (R-Ky.) withholding consent for an agreement to expedite consideration of the continuing resolution. If a time agreement is not reached, the Senate may not pass the CR until after the government shutdown deadline.
— Potential economic consequences of a looming government shutdown. As the countdown to a potential federal government shutdown continues, the ongoing impasse in Congress raises concerns about the unintended economic repercussions that could ensue. In the event of a government shutdown, several significant consequences may come into play:
- Data Disruption: Key statistics agencies, including the Bureau of Labor Statistics, the Bureau of Economic Analysis and USDA's NASS, would suspend operations. This could lead to delays in releasing critical economic data, such as the jobs report scheduled for Oct. 6, the Consumer Price Index due on Oct. 12 and USDA's Crop Production report due on Oct. 12. While a brief shutdown may not inflict severe economic damage, prolonged disruptions could hinder the Federal Reserve's ability to make informed decisions on interest rate policy. USDA's National Agricultural Statistics Service advised those conducting phone surveys to gather as much data as they Sept. 29-30 — the survey period runs from Sept. 29 to Oct. 4. Whether NASS could release the report as scheduled depends on how long a shutdown lasts, and the amount of data collected. The situation would also result in the NASS St. Louis lab stopping processing of samples gathered from fields, which could make those samples unusable depending on the length of a shutdown.
- IPOs and Mergers: A shutdown would severely curtail the Securities and Exchange Commission (SEC), preventing it from reviewing filings related to initial public offerings (IPOs) and mergers, both of which require agency approval. This could potentially impact companies amid these processes, with some having to delay their plans. The fate of the upcoming IPO of Birkenstock remains uncertain.
- Housing Market: In flood-prone areas, some prospective homebuyers may face difficulties securing mortgages, as funding for the National Flood Insurance Program would lapse during a shutdown. Federal regulations mandate that lenders ensure flood insurance coverage for mortgages in these regions. The National Association of Realtors estimates that up to 1,300 home sales daily could be disrupted by this uncertainty. Officials are planning to suspend the flood insurance requirement temporarily, although lenders would still have the discretion to decide whether buyers must obtain coverage.
Bottom line: The looming government shutdown adds a layer of uncertainty to economic conditions, impacting various sectors and prompting concerns about the accuracy of crucial economic data during a shutdown's duration.
Of note: Back in 2018 and 2019, a five-week long U.S. government shutdown reduced U.S. GDP by $3 billion, an analysis by the nonpartisan Congressional Budget Office found. Lost output from furloughed federal workers, delayed or lost government spending and wage payments as well as reduced demand cost the economy $11 billion in the short term between the two quarters affected by the shutdown. A total of $8 billion of this was estimated to have been made up after the shutdown ended on January 25. A total of $18 billion in federal discretionary spending was either lost or delayed.
— Credit agencies raise concerns over potential U.S. gov't shutdown. Credit ratings agencies are closely monitoring the situation, with Moody's warning that a gov't shutdown would have a negative impact on the U.S. credit rating. In the past, Fitch downgraded America's credit rating following debt ceiling disputes in the summer, and S&P was the first to downgrade U.S. government debt in 2011.
RUSSIA/UKRAINE
— Putin meets former Wagner group commander to discuss volunteer units in Ukraine. Russian President Vladimir Putin recently held a meeting with Andrei Troshev, a former senior commander of the Wagner group, as confirmed by the Kremlin. During the meeting, the two reportedly discussed the potential involvement of volunteer units in Ukraine. The Kremlin has been taking steps to assert control over the Wagner group following the passing of its founder, Yevgeny Prigozhin, in August. The Kremlin further stated that Troshev is currently employed at the defense ministry.
— Russia plans 70% surge in military spending for 2024 amid Ukraine conflict. The country's finance minister acknowledged the strain the war in Ukraine has placed on the budget but emphasized its status as a top priority. This announcement comes as Russian Foreign Minister Sergey Lavrov accuses the U.S. and other allies providing assistance to Ukraine of being actively engaged in a direct conflict with Russia.
Meanwhile, Ukrainian authorities are making an appeal to ordinary Russians, urging them to oppose the forced deportation of Ukrainian children to Russia and assist in their return to Ukraine. Organizers are working towards repatriating an estimated 20,000 Ukrainian children who were forcibly separated from their families and trafficked to Russia or Russian-occupied territories since the onset of the invasion last year.
— Russia currently has 150,000 excess shipping containers that rail depots are struggling to manage, reflecting a surge in Chinese goods flowing into the country but much less moving out. This is according to an analysis published Thursday by Container xChange, a Hamburg, Germany-based trading platform. "There is significant cargo movement from China into Russia but very scarce movement back to China from Russia," Christian Roeloffs, co-founder and CEO of Container xChange, said in the report. This has a "tremendously detrimental impact on the business of container logistics because of the high imbalance of demand and supply."
CHINA UPDATE
— WSJ: U.S. and China advance talks, paving the way for Xi/Biden summit. The U.S. and China are making significant progress in diplomatic exchanges, fueling anticipation for an upcoming summit between Chinese President Xi Jinping and U.S. President Joe Biden, the Wall Street Journal reports. Key developments include discussions about Vice Premier He Lifeng, a top Chinese economic-policy official, visiting Washington — the highest-ranking Chinese official to do so since Biden's inauguration.
Additionally, preparations are underway for Foreign Minister Wang Yi's visit to Washington in October, aimed at laying the groundwork for the Xi/Biden summit. These steps follow China's role in facilitating the release of an American soldier from North Korean custody, indicating positive momentum in bilateral relations. Nevertheless, challenges persist due to deep-seated differences and concerns about a potential government shutdown delaying summit planning.
Meanwhile, both nations continue to navigate their complex relationships with Russia and the Asia-Pacific Economic Cooperation forum.
Bottom line: The goal remains improving relations between the world's two largest economies, with a focus on economic discussions and preventing further escalations in tensions.
ENERGY & CLIMATE CHANGE
— Biden administration's proposed oil lease sale plan set to be the smallest ever, citing regulatory constraints and climate concerns. According to a report from Bloomberg, the Biden administration is poised to unveil a five-year oil lease sale plan that is anticipated to feature a significantly reduced number of sales compared to previous years. Sources familiar with the deliberations indicate this plan will deviate from the 11 sales initially proposed in the five-year plan from the prior year. One key factor influencing this decision is the Inflation Reduction Act (Climate Bill), which prohibits the administration from issuing new offshore wind leases unless it has introduced an oil lease sale plan offering at least 60 million acres for auction in the preceding year.
This development has sparked a contentious debate between the oil industry, advocating for consistent offshore lease sales, and environmentalists, who argue for a shift away from fossil fuels to combat climate change.
As the plan is released, Congress will have a 60-day window to review it and potentially introduce legislation to modify its provisions. This plan will shape potential lease sales policies through the year 2028.
— USDA allocates over $3 billion for climate-smart practices in FY 2024 under IRA. USDA announced the initiation of signup for more than $3 billion in funding for fiscal year (FY) 2024, as part of the Inflation Reduction Act (IRA/Climate Bill), aimed at assisting agricultural producers and forest landowners in adopting climate-smart practices. This effort includes enhancements to the Climate-Smart Agricultural and Forestry Mitigation Activities through the Environmental Quality Incentives Program (EQIP), focusing on reducing greenhouse gas (GHG) emissions and increasing carbon sequestration.
USDA's Natural Resources and Conservation Service (NRCS) will also expand national priority areas within the Agricultural Conservation Easements Program (ACEP), with a specific emphasis on grassland areas, agricultural lands at risk of conversion to non-agricultural uses, and state-specific priorities, including addressing challenges in rice production on subsiding highly organic soils.
For FY 2024, IRA allocates an additional $1.65 billion for EQIP, $472 million for the Conservation Stewardship Program (CSP), $189 million for ACEP, and $754 million for the Regional Conservation Partnership Program (RCPP). Details of RCPP initiatives will be unveiled in January.
However, USDA acknowledges the possibility of a government shutdown and cautions that support for producers, including responses to inquiries and other assistance, "would not be available until the funding lapse ends." In such an event, USDA commits to notifying producers once staff resources become accessible.
CONGRESS
— Sen. Dianne Feinstein (D-Calif.), a trailblazing lawmaker, has died, according to multiple reports. She was 90. California Democratic Gov. Gavin Newsom will have to appoint a someone to fill the seat through the 2024 election. California Democratic Reps. Barbara Lee, Adam Schiff and Katie Porter are all running for the full six-year term to be decided in next year's election. First elected to the Senate in 1992, Feinstein rose to power in Washington after authoring the 1994 assault weapons ban and later became chair of the Senate Intelligence Committee. Her death temporarily reduces Democrats' majority in the Senate from 51 seats to 50.
She was the oldest member of the U.S. Senate when she died, and questions about her mental capacity shadowed her final years in office, blemishing her reputation and forcing her to repeatedly fend off calls to resign. "I'd put my record up against anyone's," Feinstein said in a statement as she neared her 89th birthday in April 2022, after a series of news accounts that questioned her ability to do her job.
OTHER ITEMS OF NOTE
— Migrant crossings of treacherous Darién Gap soar to 400,000 in a year. Newly released data reveals that the number of migrants traversing the perilous Darién Gap, a challenging rainforest region between Colombia and Panama, has surged to a staggering 400,000 in the year leading up to September. This marks a substantial increase from the approximately 248,000 individuals who undertook this arduous journey in 2022. A significant majority of migrants crossing the Darién Gap have the ultimate goal of reaching the United States.
— Supreme Court will decide if state laws limiting social media platforms violate the Constitution. The Supreme Court has agreed to decide whether state laws that seek to regulate Facebook, TikTok, X and other social media platforms violate the Constitution.
